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G.R. No. 205469, March 25, 2015

BPI FAMILY SAVINGS BANK, INC., Petitioner, v. ST. MICHAEL MEDICAL CENTER,

INC., Respondent.

Sps Rodil are the owners of St. Michael Hospital(SMMCI). The spouses planned to upgrade the hospital to a
11-storey building. To finance the costs of construction, SMMCI applied for a loan with petitioner BPI
Family Savings Bank, Inc. (BPI Family) which gave a credit line of up to P35,000,000.00,7 secured by a
Real Estate Mortgage8 (mortgage) over three (3) parcels of land9 belonging to Sps. Rodil, on a portion of
which stands the hospital building being constructed.

In 2009, BPI Family demanded immediate payment of the entire loan obligation 15 and, soon after, filed a
petition for extrajudicial foreclosure

August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation1with prayer for the issuance of a Stay
Order as it foresaw the impossibility of meeting its obligation to BPI Family, its purported sole creditor.

In its proposed Rehabilitation Plan,23 SMMCI merely sought for BPI Family (a) to defer foreclosing on the
mortgage and (b) to agree to a moratorium of at least two (2) years during which SMMCI – either through
St. Michael Hospital or its successor – will retire all other obligations. After which, SMMCI can then start
servicing its loan obligation to the bank under a mutually acceptable restructuring agreement.24 SMMCI
declared that it intends to conclude pending negotiations for investments offered by a group of medical
doctors whose capital infusion shall be used (a) to complete the finishing requirements for the 3rd and 5th
floors of the new building; (b) to renovate the old 5-storey building where St. Michael Hospital operates;
and (c) to pay, in whole or in part, the bank loan with the view of finally integrating St. Michael Hospital
with SMMCI.

, the RTC issued a Stay Order. BPI Family elevated the matter before the CA, mainly arguing that the
approval of the Rehabilitation Plan violated its rights as an unpaid creditor/mortgagee and that the same
was submitted without prior consultation with creditors.

CA affirmed the RTC’s approval of the Rehabilitation Plan.

whether or not the CA correctly affirmed SMMCI’s Rehabilitation Plan as approved by the RTC.

Yes. Restoration is the central idea behind the remedy of corporate rehabilitation. In common parlance, to
“restore” means “to bring back to or put back into a former or original state.”42 Case law explains that
corporate rehabilitation contemplates a continuance of corporate life and activities in an effort to restore
and reinstate the corporation to its former position of successful operation and solvency, the
purpose being to enable the company to gain a new lease on life and allow its creditors to be
paid their claims out of its earnings.43 Consistent therewith is the term’s statutory definition under
Republic Act No. 10142,44 otherwise known as the “Financial Rehabilitation and Insolvency Act of 2010”
(FRIA), which provides:chanRoblesvirtualLawlibrary

Section 4. Definition of Terms. – As used in this Act, the term:

x x x x

(gg) Rehabilitation shall refer to the restoration of the debtor to a condition of successful

operation and solvency, if it is shown that its continuance of operation is economically feasible and its
creditors can recover by way of the present value of payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately liquidated.chanrobleslaw

x x x x (Emphasis supplied)cralawlawlibrary

In other words, rehabilitation assumes that the corporation has been operational but for some
reasons like economic crisis or mismanagement had become distressed or insolvent, i.e., that
it is generally unable to pay its debts as they fall due in the ordinary course of business or has liability that
are greater than its assets.45 Thus, the basic issues in rehabilitation proceedings concern the viability and
desirability of continuing the business operations of the distressed corporation, 46  all with a view of
effectively restoring it to a state of solvency or to its former healthy financial condition through the adoption
of a rehabilitation plan.

In this case, it cannot be said that the petitioning corporation, SMMCI, had been in a position of successful
operation and solvency at the time the Rehabilitation Petition was filed on August 11, 2010. While it had
indeed “commenced business” through the preparatory act of opening a credit line with BPI Family to
finance the construction of a new hospital building for its future operations, SMMCI itself admits that it has
not formally operated nor earned any income since its incorporation. This simply means that there exists no
viable business concern to be restored. Perforce, the remedy of corporate rehabilitation is improper, thus
rendering the dispositions of the courts a quo infirm.chanroblesvirtuallawlibrary

II.

In fact, for the same reasons, the Court observes that SMMCI could not have even complied with the form
and substance of a proper rehabilitation petition, and submit its accompanying documents, among others,
the required financial statements of a going concern. Section 2, Rule 4 of the 2008 Rules of Procedure on
Corporate Rehabilitation47 (Rules), which were in force at the time SMMCI’s rehabilitation petition was
filed on August 11, 2010, pertinently provides:chanRoblesvirtualLawlibrary

SEC. 2. Contents of Petition. -

x x x x

(b) The petition shall be accompanied by the following documents:

(1) An audited financial statement of the debtor at the end of its last fiscal year;ChanRoblesVirtualawlibrary

(2) Interim financial statements as of the end of the month prior to the filing of the
petition;ChanRoblesVirtualawlibrary

x x x xcralawlawlibrary

Note that this defect is not negated by the submission of the financial documents pertaining to St. Michael
Hospital, which is a separate and distinct entity from SMMCI. While the CA gave considerable weight to St.
Michael Hospital’s supposed “profitability,” as explicated in its own financial statements, as well as the
feasibility study conducted by Mrs. Alibangbang,48  in affirming the RTC, it has unwittingly lost sight of the
essential fact that SMMCI stands as the sole petitioning debtor in this case; as such, its rehabilitation
should have been primarily examined from the lens of its own financial history. While SMMCI claims that it
would absorb St. Michael Hospital’s operations, there was dearth of evidence to show that a merger was
already agreed upon between them. Accordingly, St. Michael Hospital’s financials cannot be utilized as
basis to determine the feasibility of SMMCI’s rehabilitation.

Note further that while it appears that Sps. Rodil effectively owned and exercised control over the two
entities, such fact does not, by and of itself, warrant their singular treatment for to do so would only confuse
the objective of the proceedings which is to ascertain whether the petitioning corporation, and not any other
entity related thereto (except if joining as a co-petitioning debtor), may be rehabilitated. Neither is the
proceeding the proper forum to pierce the corporate fictions of both entities for it involves no creditor
claiming to be a victim of fraud, an essential requisite for the application of such doctrine. 49cralawred

In fine, the petition should not have been given due course, nor should a Stay Order have been issued.

III.

To compound its error, the CA even disregarded the fact that SMMCI’s Rehabilitation Plan, an
indispensable requisite in corporate rehabilitation proceedings, failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a material financial commitment
to support the rehabilitation and an accompanying liquidation analysis, all of the petitioning
debtor:chanRoblesvirtualLawlibrary

SEC. 18. Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired business targets or
goals and the duration and coverage of the rehabilitation; (b) the terms and conditions of such
rehabilitation which shall include the manner of its implementation, giving due regard to the interests of
secured creditors such as, but not limited, to the non-impairment of their security liens or interests; (c) the
material financial commitments to support the rehabilitation plan; (d) the means for the
execution of the rehabilitation plan, which may include debt to equity conversion, restructuring of the
debts, dacion en pago or sale exchange or any disposition of assets or of the interest of shareholders,
partners or members; (e) a liquidation analysis setting out for each creditor that the present
value of payments it would receive under the plan is more than that which it would receive if
the assets of the debtor were sold by a liquidator within a six-month period from the
estimated date of filing of the petition; and (f) such other relevant information to enable a reasonable
investor to make an informed decision on the feasibility of the rehabilitation plan. (Emphases
supplied)cralawlawlibrary

A. Lack of Material Financial Commitment

to Support the Rehabilitation Plan.

A material financial commitment becomes significant in gauging the resolve, determination, earnestness
and good faith of the distressed corporation in financing the proposed rehabilitation plan. This
commitment may include the voluntary undertakings of the stockholders or the would-be investors of
the debtor-corporation indicating their readiness, willingness and ability to contribute funds or property to
guarantee the continued successful operation of the debtor corporation during the period of
rehabilitation.50cralawred

In this case, aside from the harped on merger of St. Michael Hospital with SMMCI, the only proposed
source of revenue the Rehabilitation Plan suggests is the capital which would come from SMMCI’s potential
investors, which negotiations are merely pending. Evidently, both propositions commonly border on
the speculative and, hence, hardly fit the description of a material financial commitment which would
inspire confidence that the rehabilitation would turn out to be successful. In fact, the Rehabilitation
Receiver himself recognizes the ambiguity of the proposition when he recommended
that:chanRoblesvirtualLawlibrary

[T]he petitioner should provide for details on its statements regarding the prospective investors. If true or
in case it happens, then this fresh capital should be used partly to pay the bank and the rest, to improve the
hospital to make it more competitive with the nearby medical service providers.51cralawred
cralawlawlibrary

In the same manner, the fact that St. Michael Hospital had previously made payments for the benefit of
SMMCI is not enough assurance that the arrangement would prospectively apply in the event that
rehabilitation is granted.  As case law intimates, nothing short of legally binding investment commitment/s
from third parties is required to qualify as a material financial commitment.52 However, no such binding
investment was presented in this case.

B. Lack of Liquidation Analysis.

SMMCI likewise failed to include any liquidation analysis in its Rehabilitation Plan. The Court observes that
as of November 16, 2009, or about 9 months prior to the filing of the petition for rehabilitation, the loan
with BPI Family had already amounted to P52,784,589.34, with interest at 10.25% p.a. or a daily interest of
about P6,655.48 and late payment charge of 36% p.a.53 However, with no SMMCI financial statement on
record, it is unclear to the Court what assets it possesses in order to determine the values to be derived if
liquidation has to be had thereby. Accordingly, this prevents the Court from ascertaining if the
petitioning debtor’s creditors can recover by way of the present value of payments projected
in the plan, more if the debtor continues as a going concern than if it is immediately
liquidated, a crucial factor in a corporate rehabilitation case. Again, the financial records of St. Michael
Hospital, being a separate and distinct entity whose merger with SMMCI only exists in the realm of
probability, cannot be taken as a substitute to fulfill the requirement. What remains pertinent are the
financial statements of SMMCI for it solely stands as the debtor to be rehabilitated, or liquidated in this
case.

At any rate, records disclose that St. Michael Hospital’s current cash operating position 54 is just enough to
meet its own maturing obligations.55 While it has substantial total assets, a large portion thereof is
comprised of fixed assets, while its current assets56 consist mostly of inventory.57 Still, the total liquidation
assets and the estimated liquidation return to the creditors, as well as the fair market value vis-à-vis the
forced liquidation value of the fixed assets that would guide the Court in assessing the feasibility of the
Rehabilitation Plan were not shown.

C. Effect of Non-Compliance.

The failure of the Rehabilitation Plan to state any material financial commitment to support rehabilitation,
as well as to include a liquidation analysis, translates to the conclusion that the RTC’s stated considerations
for approval, i.e., that (a) the plan provides for recovery rates on operating mode as opposed to liquidation
values; (b) it contains details for a business plan which will restore profitability and solvency on petitioner;
(c) the projected cash flow can support the continuous operation of the debtor as a going concern;  and (d)
the plan has provisions to ensure that future income will inure to the benefit of the creditors, 58 are
actually unsubstantiated, and hence, insufficient to decree SMMCI’s rehabilitation. It is well to
emphasize that the remedy of rehabilitation should be denied to corporations that do not qualify under the
Rules. Neither should it be allowed to corporations whose sole purpose is to delay the enforcement of any of
the rights of the creditors, which is rendered obvious by: (a) the absence of a sound and workable business
plan; (b) baseless and unexplained assumptions, targets, and goals; and (c) speculative capital infusion or
complete lack thereof for the execution of the business plan. 59  Unfortunately, these negative indicators have
all surfaced to the fore, much to SMMCI’s chagrin.

IV.

While the Court recognizes the financial predicaments of upstart corporations under the prevailing
economic climate, it must nonetheless remain forthright in limiting the remedy of rehabilitation only to
meritorious cases. As above-mentioned, the purpose of rehabilitation proceedings is not only to enable the
company to gain a new lease on life but also to allow creditors to be paid their claims from its earnings,
when so rehabilitated.  Hence, the remedy must be accorded only after a judicious regard of all
stakeholders’ interests; it is not a one-sided tool that may be graciously invoked to escape every position of
distress.

In this case, not only has the petitioning debtor failed to show that it has formally began its operations
which would warrant restoration, but also it has failed to show compliance with the key requirements under
the Rules, the purpose of which are vital in determining the propriety of rehabilitation. Thus, for all the
reasons hereinabove explained, the Court is constrained to rule in favor of BPI Family and hereby dismiss
SMMCI’s Rehabilitation Petition. With this pronouncement, it is now unnecessary to delve on the other
ancillary issues raised herein.

WHEREFORE, the petition is GRANTED. The Decision dated August 30, 2012 and the Resolution dated
January 18, 2013 of the Court of Appeals in CA-G.R. SP No. 121004 upholding the Order dated August 4,
2011 of the Regional Trial Court of Imus, Cavite, Branch 21 approving the Rehabilitation Plan of respondent
St. Michael Medical Center, Inc. (SMMCI) are hereby REVERSED and SET ASIDE. Accordingly,
SMMCI’s Petition for Corporate Rehabilitation is DISMISSED.

SO ORDERED.cralawlawlibrary